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What GAO Found

Thirteen of the 16 state transportation agencies GAO contacted used Life-Cycle Cost Analysis (LCCA) to select the pavement type (e.g., asphalt or concrete) for certain road construction and rehabilitation projects. Officials in all 13 states indicated that LCCA helped ensure that the agency selected the pavement that was most cost-effective over the long term, but states' specific LCCA practices varied. In general, these states used LCCA for larger projects, but each state had unique criteria to determine which projects should be subject to an LCCA. Likewise, the broad categories of LCCA inputs--such as agency costs, timing of future road work, and discount rate--are similar, but state transportation agencies handled each of these inputs in different ways. For example, estimates of when future roadwork would occur for a particular pavement type were based on state-specific factors, such as past experience with pavements and climate. Furthermore, state agencies used different criteria to decide if LCCA results clearly indicated a pavement type with the lowest life-cycle cost. In 9 of the 13 states that used LCCA, the Federal Highway Administration's (FHWA) LCCA guidance was an important influence on state practices, according to state transportation officials, and 7 states used LCCA software developed by FHWA.

FHWA's LCCA guidance largely aligns with the GAO Cost Guide's best practices for two of the four phases of the cost-estimating process and partially aligns with two other phases. FHWA's guidance in the Initiation phase, which includes initial planning steps, aligns with best practices overall. Agency guidance covers about half of the best practices of the Assessment phase, but does not, for example, discuss the use of independent cost estimates for comparison and cross checks, an important quality step to ensure the estimate's credibility. In the Analysis phase, FHWA's guidance does a good job explaining how to address the variability inherent in cost estimation, but could better address how LCCA should be documented for subsequent review. Lastly, in the Presentation phase, FHWA's guidance does not include sufficient information on how to present LCCA results to management for decision-making and on when an LCCA should be updated. By better incorporating best practices in the guidance, FHWA could help states produce credible and accurate cost estimates and make more cost-effective federal-aid highway fund investment decisions.

Why GAO Did This Study

LCCA provides state transportation agencies with a tool to evaluate and select the most cost-effective type of pavement, one of the major cost components of many highway projects. Given the high demand for federal highway funding, the federal government has an acute interest in helping states use LCCA to make cost-effective decisions when investing federal-aid highway funds. Accordingly, it is important that FHWA's guidance on LCCA aligns with best practices. The Moving Ahead for Progress in the 21st Century Act directed GAO to review LCCA best practices. GAO (1) described how state transportation agencies conduct and use LCCA and (2) assessed the extent to which FHWA's LCCA guidance conforms to the GAO Cost Guide's cost-estimating best practices.

GAO reviewed states' LCCA practices and interviewed officials from 16 states (visiting 4), selected to provide information on a wide range of LCCA approaches and a wide geographical distribution. Information gathered from these states is not generalizable to all states. GAO also interviewed FHWA officials. GAO assessed the extent to which FHWA's LCCA guidance, including software and documentation, conforms to best practices.

What GAO Recommends

To better ensure federal-aid highway funds are invested effectively, FHWA should update LCCA guidance to fully incorporate the Cost Guide's best practices. The Department of Transportation agreed to consider this recommendation and provided technical comments that were incorporated as appropriate.

For more information, contact James R. McTigue, Jr., at (202) 512-2834 or McTigueJ@gao.gov.

Recommendation for Executive Action

Status: Closed - Implemented

Comments: Life-Cycle Cost Analysis (LCCA) provides state transportation agencies with a tool to evaluate and select the most cost-effective type of pavement, one of the major cost components of many highway projects. Given the high demand for federal highway funding, the federal government has an acute interest in helping states use LCCA to make cost-effective decisions when investing federal-aid highway funds. Accordingly, it is important that the Federal Highway Administration's (FHWA) guidance on LCCA aligns with best practices. In 2013, GAO reported that thirteen of the 16 state transportation agencies GAO contacted used LCCA to select the pavement type (e.g., asphalt or concrete) for certain road construction and rehabilitation projects. Officials in all 13 states indicated that LCCA helped ensure that the agency selected the pavement that was most cost-effective over the long term, but states' specific LCCA practices varied. Furthermore, state agencies used different criteria to decide if LCCA results clearly indicated a pavement type with the lowest life-cycle cost. In 9 of the 13 states that used LCCA, FHWA's LCCA guidance was an important influence on state practices, according to state transportation officials, and 7 states used LCCA software developed by FHWA. The agency's LCCA guidance largely aligns with the GAO Cost Guide's best practices for two of the four phases of the cost-estimating process and partially aligns with two other phases. FHWA's guidance in the Assessment phase partially aligns with obtaining data and developing a point estimate for comparison with an independent cost estimate. Agency guidance in the Presentation phase does not include sufficient information on how to present LCCA results to management for decision-making and on when an LCCA should be updated. Therefore, GAO recommended that FHWA update its LCCA guidance to incorporate the best practices in GAO's Cost Guide to include guidance on data quality and reliability, independent cost estimates, documentation of analysis, presentation of analysis, and when to update a cost estimate. In March 2015, FHWA issued a supplement to existing agency guidance on LCCA in response to GAO's report. GAO reviewed FHWA's supplemental guidance and found it sufficiently incorporates GAO's Cost Guide principles in the recommended areas within in the Assessment and Presentation phases. In general, the supplement provides additional information and guidance that is largely consistent with the Cost Guide in each of these areas. For example, the Cost Guide states that independent cost estimates and documentation of analysis help to ensure the objectivity and credibility of cost estimates and the supplement includes these practices. Further, the supplement incorporates GAO's Cost Guide directly into FHWA's guidance by reference. FHWA has included the supplement in its LCCA guidance available on the agency's website and distributed the supplement to relevant FHWA officials. As a result, state transportation agencies will be able to improve the accuracy, credibility, and use of LCCA in pavement-type selection decisions and, ultimately, make more cost-effective investment decisions.

Recommendation: The Secretary of Transportation should direct the FHWA Administrator to issue updated LCCA guidance to fully incorporate the cost-estimating best practices in GAO's Cost Guide, including guidance regarding the following: (1) input data quality and reliability, (2) use of independent cost estimates, (3) documentation of the analysis, (4) how to present the analysis for management approval, and (5) describing when the estimate should be updated.